Independence Crucial to Monetary Policymaking

Independence Crucial to Monetary Policymaking: Atlanta Fed President

Setting monetary policy is most effectively done in an apolitical environment, Atlanta Fed President and Chief Executive Officer Dennis Lockhart said in a recent speech to the Downtown Atlanta Rotary. Lockhart was commenting on recent legislative proposals that would subject the Fed's policymaking decisions to audits and potential political pressure. "Monetary policy should not swing with the daily news or be influenced by short-term political pressures," he said.

photo of Atlanta Fed Chief Dennis Lockhart

Staying on course requires independence
Since 1978, the Fed's monetary policymaking has been exempt from review by the Government Accountability Office (GAO). But "audit the Fed" amendments have recently made some headway in Congress. In this context, Lockhart said, auditing is not about examining the Fed's books, which is already done regularly. Rather, the audits proposed in legislation "can amount to full-blown policy reviews," he said, which could have the effect of "politicizing a process that should remain apolitical."

Making politically unpopular decisions is essential to policymaking
Lockhart also discussed the importance of the Fed's ability to make decisions that might be unpopular among elected officials, such as increasing the fed funds rate, sometimes a difficult choice but one necessary to, for example, combat inflation. "The Fed must have the capacity to make unpopular decisions—to take away the punch bowl, as it were," he said. "Many of you remember the circumstances of the early 1980s when the Paul Volcker–led FOMC [Federal Open Market Committee] acted against inflation. One should ask—would Volcker have been effective if the intense opposition to his policies was joined with formal, statutory methods of bringing pressure? The stakes in this issue are big."

On retaining the Fed's regional structure
Lockhart also provided perspectives on other ideas that have been floated, specifically ideas that could politicize the Fed's regional Reserve Bank structure. Continuing to allow the varied regions of the United States to have input into the formulation of monetary policy is essential to having citizen input into the central bank, Lockhart said, adding that some legislative proposals would have the effect of concentrating decision making in New York and Washington.

"From its inception, the Federal Reserve System was designed to have checks and balances, to avoid concentration of power in New York and Washington, and to give every region of the country an apolitical voice in policy formulation," Lockhart said. Describing the Atlanta Fed's far-reaching network developed to gather data from throughout the Southeast, Lockhart spoke of the importance of preserving citizens' input. "We have worked hard to democratize the region's input on national policy decisions through aggressive outreach to business and other leaders," he said.

Closing his remarks, Lockhart said he understood the impulse driving some of the regulatory reform discussion. "The country is just now emerging from a long and painful recession caused largely by a crisis in our financial system," he said. "We need to fix things, but purported reforms that weaken how the country's economic affairs are governed will be harmful and tough to undo. This debate is not a remote political one. It's a Main Street issue."

January 28, 2010